Ethereum (ETH) has enjoyed a good run so far in 2021, with its value increasing from about $1,300 at the beginning of the year, to nearly $4,000 in May. However, Ethereum’s price aside, consistent problems on the Ethereum blockchain have brought to light the anger of traders and decentralized application (DApp) developers on the Ethereum ecosystem. Lack of scalability and high gas fees are the main issues.
As one of crypto’s biggest platforms for decentralized applications, Ethereum has been dealing with network congestion that reflects the high gas fees that people have had to pay with every transaction. Since the start of the year, at times, the cost of facilitating transactions on the Ethereum ecosystem has hovered around the $16 to $20 range, going as high as $100 on DApps like Uniswap that have high trading volumes.
From this point of view, the transition to Ethereum 2.0 (Eth2) as a solution designed to address scalability issues, as well as solve the problem of skyrocketing gas fees, is a welcomed reprieve by the Ethereum community.
Eth2, or Serenity, is set to be a technical upgrade that will move the Ethereum blockchain from a proof-of-work (PoW) protocol to a proof-of-stake (PoS) blockchain, thereby increasing its capacity for transactions, reducing gas fees and making the network easy to scale and more eco-friendly when generating new coins and validating transactions.
After years in the making, the move toward Eth2 began with the launch of the Beacon chain as a first step to revolutionize the Ethereum network. The move to a PoS blockchain will be one of the biggest updates in the lifespan of the Ethereum blockchain, and therefore it will be carried out in phases. The Ethereum London hard fork is one of the upgrades that will bring the Ethereum network closer to Serenity.
Berlin hard fork
The Berlin upgrade went live at block 12,244,000 on April 15. Named after the host city of the inaugural Ethereum Devcon convention, Berlin is a forerunner to the bigger London hard fork and incorporates four Ethereum Improvement Proposals (EIPs) that deal with gas prices and enable new transaction types.
Berlin's EIP-2565 involved the reduction of gas fees on Ethereum. This mechanism uses a function called modular exponentiation (ModExp) to benefit Ethereum users who need to run services on the Ethereum network.
EIP0-2718 protocol makes all transaction types backward-compatible, thereby making it easier to add new transaction logic into Ethereum. Developers who created this protocol used a new function known as the Typed Transaction Envelope.
The Berlin Hard fork also features a proposal titled EIP-2929, which introduces an increase in gas prices in opcode transactions. In computing, opcodes are portions of a machine language that specifies operations. Ethereum's opcodes have been a major pain point for Denial-of-Service (DoS) attacks in the past. With EIP-2929, a higher gas cost will remove the incentive for DoS attacks.
Lastly, the Berlin hard fork features the EIP-2930 protocol that builds upon EIP-2718, bringing about a new transaction type of mechanism that allows users to form wallet address lists so they can trade at much lower gas fees.
Reactions to Berlin
The EIPs introduced with the Berlin hard fork were meant to reduce gas fee cost at a time when saturation on the network was at its peak, as well as improve Ethereum’s efficacy. However, the update was postponed several times due to concerns about possible vulnerabilities caused by the centralization of the upgrade.
Also, the consensus in the Ethereum community was that Berlin would be less impactful in the short term, but still pave the way for the awaited London hard fork’s EIP-1559 protocol.
The London hard fork: Increasing block elasticity
The Ethereum London hard fork is part of Ethereum’s road map on its way to release Eth2. The long-awaited hard fork will likely launch on Aug. 4 in a delayed release previously rescheduled for the end of July.
The Ethereum London hard fork will include five Ethereum Improvement Protocols. The most notable of the five EIPs include the EIP-1559 and EIP-3554.
EIP-1559 introduces a new fee structure that will make Ethereum deflationary. While highly controversial, this protocol change aims to burn part of the fees generated on the Ethereum blockchain, hence reducing the miner’s revenue.
EIP-3554, on the other hand, will introduce incremental difficulty to Ethereum mining, thereby eliminating the incentive for miners’ participation on the PoW network. The move is expected to push miners into the new PoS blockchain while freezing the proof of work network.
Ethereum miners react to EIP-1559
While Ethereum users and investors anticipate the launch of EIP-1559, as it will help reduce gas fees, Ether miners were not thrilled with the proposal.
The hotly awaited upgrade will set Ethereum on a deflationary path through the burning of fees that originally went to the miners. EIP-1559 plans to set a fixed fee for everyone on the Ethereum network so that no one will have the option of paying more for their transaction to be confirmed faster than other transactions. The network sets the fee automatically, and then the fee is collected from transactions and burned, thus allowing for a dynamic expansion and contraction of block sizes.
For users looking to prioritize their transactions, this EIP-1559 upgrade will include an optional “priority fee” that will act more like a tip that incentivizes the miner to prioritize the transaction. Miners will be able to pocket this priority fee, however, the base fee will be burned.
According to James Beck, director of communications at ConsenSys — a technology company backing Ethereum's blockchain — burning the base fee will place deflationary pressure on the issuance of ETH.
While some argue that this upgrade’s deflationary mechanism will result in a boom for Ether’s price and will create a positive price feedback loop, some of the disgruntled miners have criticized the move, as it will reduce their income significantly.
In protest of the upcoming implementations, some Ethereum miners voiced the desire to hold a 51-hour show of force attack on the Ethereum network, directing computational resources to a pool that supports unilateral changes to the Ethereum network. The threats have since died down, and Vitalik Buterin has proposed a quick transition to Eth2 as a solution.
The upcoming future of hard forks on Ethereum
The London and Berlin hard forks are just the start of the improvement proposals coming to Ethereum before the network transitions to Eth2. After the London hard fork, the Ethereum community will prepare for the Shanghai hard fork which is scheduled to go live by the end of the year.
The Shanghai hard fork is set to be the final step of the journey towards merging Eth1 to Eth2. Ongoing discussions among developers about the Shanghai hard fork suggest that the upgrade will take place in October 2021 and will exclusively implement a merger rather than an additional feature to the upcoming Eth2, as has been the case with previous hard forks.
Overall, there is a mixture of excitement and disappointment in the Ethereum community as some are anticipating the move to a PoS blockchain which will translate to cheaper transaction costs, while others decry a reduction in their profits. It remains to be seen whether the upgrades will result in a swift and successful transition to Ethereum 2.0.